Emerging equities were down more than 15% in euro terms during the month of August last year, and the MSCI Emerging Markets Index has only just recovered the ground it lost then (see graph on page 2). August 2015 was not the first bad month for emerging market investors over the past couple of years, and consequently most investors have remained underweight the asset class over that period.
In September last year, just after EM equities had tanked, investor sentiment towards the asset class was outright pessimistic. Those planning to reduce their allocation to emerging market equities outnumbered those intending to increase their exposure in almost every country in Europe. One year on, more than four in 10 fund buyers say they will increase their exposure in the next 12 months, if they haven’t already done so (our latest Pan-European dataset dates back to the end of June).
“Our allocation to emerging markets has been extremely low for the past three years. We’ve only had some on and off tactical allocations via ETFs during the time,” says Tanja Wennonen-Kärnä, senior portfolio manager at Evli, a private bank in Finland. “At the beginning of the year we started to buy strategically again, and after Brexit we decided to start to seriously invest. Some 20% of our equity allocation is now in EM.”
Thomas Romig, who manages a multi-asset fund at Assenagon, has done something similar. “EM equities look comparably strong, and our current allocation of 25% is the highest I’ve had in approximately three years,” he says.
"Could you think of a precedent of an asset class on which investors were as bullish and underweight at the same time as on EM equities now? Probably not."
On a better footing
There are indeed lots of factors to speak for emerging markets at the moment. “Macro numbers are slightly better, commodities are on a better footing and the Fed has pushed rate hikes forward,” as Wennonen-Kärnä sums it up.
The combination of these three factors are undoubtedly positives for the asset class, but rather than game changers they are incremental improvements. After all, the risks that prompted the ‘China-induced market correction’ of August 2015 are still in place, even though a serious economic slowdown in China has so far been avoided.